HEALTHY EXTRACTS INC. - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2017

For the transition period from _______________ to _______________.

Commission file number 333-202542

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the previous 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____

As of May 22, 2017, there were 23,724,216 shares of common stock, $0.001 par value, issued and outstanding.

GREY CLOAK TECH INC.

TABLE OF CONTENTS 

PART I – FINANCIAL INFORMATION

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

ITEM 1 Financial Statements

GREY CLOAK TECH INC.

BALANCE SHEETS

(unaudited)

The accompanying notes are an integral part of these financial statements.

GREY CLOAK TECH INC.

STATEMENT OF OPERATIONS

(unaudited)

The accompanying notes are an integral part of these financial statements.

GREY CLOAK TECH INC.

STATEMENT OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these financial statements.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Grey Cloak Tech Inc. (the “Company”) was incorporated in the State of Nevada on December 19, 2014. The Company was formed to provide cloud based software to detect advertising fraud on the internet.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2017 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s form 10-K for the year ended December 31, 2016 filed with the SEC on April 17, 2017.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash

Cash includes cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

The Company will record revenue when it is realizable and earned and the computer programming services or marketing services have been rendered to the customers. Additionally, the Company will record revenue from the sale of its software when the software is delivered to the customer or it will be recognized ratably throughout the term of the contract.

Concentration

One customer accounted for 100% of total revenue earned during the three months ended March 31, 2017 and 2016. 100% of the accounts receivable is due from this customer at March 31, 2017 and December 31, 2016.

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. As of March 31, 2017, the Company did not have any amounts recorded pertaining to uncertain tax positions.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurements

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which  defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is the only financial liability measure at fair value on a recurring basis.

The change in Level 3 financial instrument is as follows:

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Convertible Instruments

The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities. During the three months ending March 31, 2017, the Company recognized a loss on extinguishment of $52,977 from the conversion of convertible debt with a bifurcated conversion option.

Common Stock Purchase Warrants

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). The Company classifies as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification is required.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 3 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has generated minimal revenues from operations. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring start up costs and expenses. As a result, the Company incurred accumulated net losses from Inception (December 19, 2014) through the period ended March 31, 2017 of $4,619,470. In addition, the Company’s development activities since inception have been financially sustained through equity financing. Management plans to seek funding through debt and equity financing.

NOTE 4 – RELATED PARTY

For the three months ended March 31, 2017, the Company had expenses totaling $28,000 to an officer and director for salaries, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of March 31, 2017, there was $0 in accounts payable – related party.

For the three months ended March 31, 2017, the Company had expenses totaling $28,500 to a company owned by an officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of March 31, 2017, there was $24,299 in accounts payable – related party.

NOTE 5 – NOTES PAYABLE – RELATED PARTY

On July 28, 2016, the Company received a loan of $15,000 from an officer and director of the Company. The loan bears interest at 8% per annum and due the earlier of January 27, 2017 or when the Company receives financing of over $45,000.

During the three months ended March 31, 2017, the Company recorded interest expense of $296. As of the date of this filing, the loan is in default.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 6 – CONVERTIBLE DEBT

On September 22, 2016, the Company executed a convertible promissory note for $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. During default the lender has the right to convert the principal amount and unpaid interest of the loan at a rate of either the lesser of $0.20 or 60% of the lowest trading price during the prior 20 days of conversion.

On September 22, 2016, the Company executed a convertible promissory note for $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. During default the lender has the right to convert the principal amount and unpaid interest of the loan at a rate of either the lesser of $0.20 or 60% of the lowest trading price during the prior 20 days of conversion.

On October 5, 2016, the Company executed a convertible promissory note for $55,000 with an original issue discount of $10,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. During default the lender has the right to convert the principal amount and unpaid interest of the loan at a rate of either the lesser of $0.20 or 60% of the lowest trading price during the prior 20 days of conversion.

On January 23, 2017, the Company executed three convertible promissory notes totaling $100,000. The loans bear interest at 8% per annum and are due on January 23, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.04 per share or 60% of the lowest trading price during the prior 20 days of conversion.

On March 3, 2017, the Company executed a convertible promissory note for $90,000. The loan bears interest at 12% per annum and is due on December 1, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 55% of the lowest trading price during the prior 20 days of conversion.

On March 7, 2017, the Company executed three convertible promissory notes totaling $90,000. The loans bear interest at 10% per annum and is due on March 9, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.03 per share or 55% of the lowest trading price during the prior 20 days of conversion.

On March 8, 2017, the Company executed two convertible promissory notes totaling $60,000. The loans bear interest at 10% per annum and are due on March 9, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.03 per share or 55% of the lowest trading price during the prior 20 days of conversion.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 6 – CONVERTIBLE DEBT (CONTINUED)

On March 9, 2017, the Company executed a convertible promissory note for $66,000. The loan bears interest at 12% per annum and is due on December 1, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 50% of the lowest trading price during the prior 20 days of conversion.

On March 14, 2017, the Company executed a convertible promissory note for $15,000. The loan bears interest at 10% per annum and is due on March 9, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.03 per share or 55% of the lowest trading price during the prior 20 days of conversion.

During the three months ended March 31, 2017, the Company recorded interest expense of $13,106 and amortization of debt discount of $100,576.

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt.

NOTE 7 – STOCKHOLDERS’ EQUITY

Authorized Stock

The Company has authorized 75,000,000 common shares with a par value of $0.001 per share.  Each common share entitles the holder to one vote on any matter on which action of the stockholders of the corporation is sought.

Common Share Issuances

On February 3, 2017, the Company issued 1,555,119 shares of common stock for the conversion of debt totaling $139,961 and gain on settlement of debt of $10,886.

On February 22, 2017, the Company issued 289,000 shares of common stock for the conversion of debt totaling $8,011 and gain on settlement of debt of $20,889.

On March 1, 2017, the Company issued 300,000 shares of common stock for the conversion of debt totaling $8,100 and gain on settlement of debt of $17,700.

On March 6, 2017, the Company issued 616,895 shares of common stock for the conversion of debt totaling $142,771 and loss on settlement of debt of $80,465.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(unaudited)

NOTE 7 – STOCKHOLDERS’ EQUITY (CONTINUED)

On March 13, 2017, the Company issued 1,578,926 shares of common stock for the conversion of debt totaling $206,721 and loss on settlement of debt of $21,987.

On March 28, 2017, the Company issued 711,111 shares of common stock for the cashless exercise of 60,000 warrants.

Warrant Issuances

As of March 31, 2017, there were 9,696,250 warrants outstanding, of which 2,696,250 are fully vested.

NOTE 8 – SUBSEQUENT EVENTS

On April 10, 2017, the Company executed a convertible promissory note for $30,000. The loan bears interest at 10% per annum and is due on April 10, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.03 per share or 55% of the lowest trading price during the prior 20 days of conversion.

On April 20, 2017, the Company took a third tranche of $45,000 with an OID of $10,750 from the convertible promissory note up to $300,000. The third tranche is due on April 20, 2018. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 56% of the lowest trading price during the prior 20 days of conversion. However, if the stock price is below $0.10 then the loan can convert at a rate of 46% of the lowest trading price during the prior 20 days of conversion.

On April 28, 2017, the Company issued 1,156,889 shares of common stock for debt converted of $27,500 of principal and $3,736 of accrued interest.

On May 10, 2017, the Company issued 360,000 shares of common stock for debt converted of $7,561 of principal and $500 in fees.

On May 12, 2017, the Company executed a convertible promissory note for $60,000. The loan bears interest at 12% per annum and is due on February 20, 2018. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 61% of the average of the lowest two trading price during the prior 15 days of conversion.

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Summary Overview

We were formed in December 2014. We are developing a cloud based software to detect advertising fraud on the internet. We had revenues of approximately $163,000 in the year ended December 31, 2016, 100% of which was from a single customer. We had revenues of $42,000 for the three months ended March 31, 2017, all of which was from the same customer.

ShareRails, LLC

On March 31, 2017, we entered into a Share Exchange Agreement to acquire ShareRails, LLC (“ShareRails”), a company that provides customers with a unique mobile platform for connecting shoppers and retailers. In connection with the Share Exchange Agreement, we appointed one of ShareRails’ founders, Joseph Nejman, to serve as our President and on our Board of Directors.

However, ShareRails failed to meet one of the conditions for closing the share exchange and on May 19, 2017, we terminated the transaction and Share Exchange Agreement. Mr. Nejman also resigned from his positions of Director and President. ShareRails issued a convertible promissory note in the amount of $100,000 whereby ShareRails will repay funds advanced, or to be advanced, to ShareRails by the Company. While we did not acquire ShareRails, we intend to continue working with ShareRails and its founders to pursue business opportunities in the mobile retail space.

 Going Concern

As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the years ended December 31, 2015 and 2016, which includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. Since inception, we have been engaged substantially in financing activities and developing our business plan and incurring startup costs and expenses. As a result, we have incurred accumulated net losses from Inception (December 19, 2014) through the period ended March 31, 2017 of $4,619,470. In addition, our development activities since inception have been financially sustained through equity financing. Management plans to seek funding through debt and equity financing.

Results of Operations for the Three months Ended March 31, 2017 and 2016

Introduction

We had revenues of $42,000 for the three months ended March 31, 2017, compared to $39,000 for the three months ended March 31, 2016. Our operating expenses were $391,270 for the three months ended March 31, 2017, compared to $358,675 for the three months ended March 31, 2016, an increase of $32,595, or 9.1%.

Our operating expense consisted mainly of consulting fees and salaries to related parties of $56,500 and legal and professional fees of $52,185 for the three months ended March 31, 2017.

Revenues and Net Operating Loss

Our revenue, operating expenses, net operating loss, and net loss for the three ended March 31, 2017 and 2016 were as follows:

Revenues

Revenues were $42,000 for the three months ended March 31, 2017, compared to $39,000 for the three months ended March 31, 2016, an increase of $3,000, or 7.7%. All of the total revenue came from a single customer.

Direct Cost of Revenue

Direct cost of revenue expenses was $3,000 for the three months ended March 31, 2017, compared to $11,603 for the three months ended March 31, 2016. Direct cost of revenue consists of $3,000 and decreased primarily due to decrease in costs based on the type of project we completed.

General and Administrative

General and administrative expenses were $331,770 for the three months ended March 31, 2017, compared to $298,422 for the three months ended March 31, 2016, an increase of $33,348, or 11.2%. General and administrative expenses increased primarily due to consulting and financing and loan fees. General and administrative expenses – related party were $56,500 for the three months ended March 31, 2017, compared to $48,650 for the three months ended March 31, 2016, an increase of $7,850, or 16.1%. General and administrative expenses – related party consists of $28,000 to an officer and director for salaries and $28,500 to a company owned by an officer and director for consulting fees.

Operating Loss

Net operating loss was $349,270 for the three months ended March 31, 2017, compared to $319,675 for the three months ended March 31, 2016, an increase of $29,595 or 9.3%. Net operating loss increased primarily due to an increase in general and administrative expenses, as set forth above.

Other Income (Expense)

Other expense was $148,893 for the three months ended March 31, 2017, compared to other expense of $11,964 for the three months ended March 31, 2016, an increase of $136,929. Other expense increased primarily due to an increase of interest expense, net of interest income, of $1,272,493 offset by a $1,176,873 change in fair value of derivative liabilities connected to the conversion features of our convertible debt. The interest expense is relatively high compared to the amount of the debt due to the derivative accounting from the terms of the convertible debt.

Net Loss

Net loss was $498,163 for the three months ended March 31, 2017, or $0.03 per share, compared to $331,639 for the three months ended March 31, 2016, or $0.02 per share, an increase of $166,524. Net loss increased, as set forth above, primarily due to an increase in interest expense from new debt issuances and an increase in general and administrative expenses.

Liquidity and Capital Resources

Introduction

During the three months ended March 31, 2017, because we generated only nominal revenues, we had negative operating cash flows. Our cash on hand as of March 31, 2017 was $31,618, which was derived primarily from the issuance of convertible promissory notes to investors. Our monthly cash flow burn rate for 2016 was approximately $45,000 and for the three months ended March 31, 2017 was approximately $75,000. Although we have moderate short term cash needs, as our operating expenses increase we will face strong medium to long term cash needs. We anticipate that these needs will be satisfied through the issuance of debt or the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs.

Our cash, current assets, total assets, current liabilities, and total liabilities as of March 31, 2017 and December 31, 2016, respectively, are as follows:

Our cash increased because we were able to raise capital from the sale of convertible notes. Our total current assets increased primarily for the same reason and because of an increase in notes receivable. Our total current liabilities decreased primarily because of the change in fair value of our derivative liability connected to the conversion feature of our convertible promissory notes. Our accumulated deficit increased by $498,163 to $4,619,470 while our total stockholders’ deficit decreased by $887,775 to $1,471,644, primarily due to issuances of stock upon conversion of our convertible notes. .

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.

Cash Requirements

Our cash on hand as of March 31, 2017 was $31,618. Based on our nominal revenues and current monthly burn rate of approximately $75,000 per month, we will need to continue to fund operations by raising capital from the sale of our stock and debt financings.

Sources and Uses of Cash

Operating Activities

We had net cash used in operating activities of $225,234 for the three months ended March 31, 2017, compared to $102,560 for the three months ended March 31, 2016. For the three months ended March 31, 2017, the net cash used in operating activities consisted primarily of our net loss of $498,163 and the increase in the fair value of our derivative liabilities of $1,176,873, offset primarily by non-cash amortization of debt discount of $1,259,388 and increases in accounts payable, accrued liabilities, notes payable and convertible notes.

Investing Activities

We had $20,000 net cash used in investing activities for the three months ended March 31, 2017 due to payments for notes receivable, and $1,581 net cash used in investing activities for the three months ended March 31, 2016 due to purchase of fixed assets.

Financing Activities

Our net cash provided by financing activities for the three months ended March 31, 2017 was $252,750, all of which was proceeds from convertible notes payable, offset by repayments on convertible notes, compared to $149,000 for the three months ended March 31, 2016, all of which was proceeds from the issuance of convertible notes and the exercise of warrants.

As a smaller reporting company, we are not required to provide the information required by this Item.

(a)       Disclosure Controls and Procedures

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2017, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2017, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in our Annual Report on Internal Control Over Financial Reporting filed in our Annual Report on Form 10-K.

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all errors and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b)       Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report, the three month period ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 Legal Proceedings

We are not a party to or otherwise involved in any legal proceedings.

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

ITEM 1A Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

Except as discussed below, we have not issued unregistered securities during the period covered by this report: 

As previously reported on our Current Report on Form 8-K filed on April 6, 2017 and discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we entered into a Share Exchange Agreement with ShareRails and its members to acquire ShareRails in exchange for shares of our equity securities. On May 19, 2017 we terminated this agreement, and all related agreements and transactions, due to failure of the ShareRails members to meet a condition to closing in the Share Exchange Agreement. Consequently, all share issuances and exchanges were rescinded.

Common Share Issuances

On February 3, 2017, the Company issued 1,555,119 shares of common stock for the conversion of debt totaling $139,961 and gain on settlement of debt of $10,886.

On February 22, 2017, the Company issued 289,000 shares of common stock for the conversion of debt totaling $8,011 and gain on settlement of debt of $20,889.

On March 1, 2017, the Company issued 300,000 shares of common stock for the conversion of debt totaling $8,100 and gain on settlement of debt of $17,700.

On March 6, 2017, the Company issued 616,895 shares of common stock for the conversion of debt totaling $142,771 and loss on settlement of debt of $80,465.

On March 13, 2017, the Company issued 1,578,926 shares of common stock for the conversion of debt totaling $206,721 and loss on settlement of debt of $21,987.

On March 28, 2017, the Company issued 711,111 shares of common stock for the cashless exercise of 60,000 warrants.

Convertible Notes

On January 23, 2017, the Company executed three convertible promissory notes totaling $100,000. The loans bear interest at 8% per annum and are due on January 23, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.04 per share or 60% of the lowest trading price during the prior 20 days of conversion.

On March 3, 2017, the Company executed a convertible promissory note for $90,000. The loan bears interest at 12% per annum and is due on December 1, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 55% of the lowest trading price during the prior 20 days of conversion.

On March 7, 2017, the Company executed three convertible promissory notes totaling $90,000. The loans bear interest at 10% per annum and is due on March 9, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.03 per share or 55% of the lowest trading price during the prior 20 days of conversion.

On March 8, 2017, the Company executed two convertible promissory notes totaling $60,000. The loans bear interest at 10% per annum and are due on March 9, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.03 per share or 55% of the lowest trading price during the prior 20 days of conversion.

On March 9, 2017, the Company executed a convertible promissory note for $66,000. The loan bears interest at 12% per annum and is due on December 1, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 50% of the lowest trading price during the prior 20 days of conversion.

On March 14, 2017, the Company executed a convertible promissory note for $15,000. The loan bears interest at 10% per annum and is due on March 9, 2018. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of the lower of $0.03 per share or 55% of the lowest trading price during the prior 20 days of conversion.

All of the issuances of securities above were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, the investors were sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

ITEM 3 Defaults Upon Senior Securities

There have been no events which are required to be reported under this Item.

ITEM 4 Mine Safety Disclosures

Not applicable.

ITEM 5 Other Information

None.

ITEM 6 Exhibits

(a)       Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.